THE EURO, WAGES AND PRICES

May 7, 2009

Adoption of the Euro has sped up deregulation in the nations that participate in this common currency, according to researchers with the National Bureau of Economic Research (NBER). Their study comes at a particularly sensitive time because the current recession is boosting unemployment in European Union (EU) nations that, thanks to the Euro, can no longer devalue their currencies to cushion the blow.

In some ways, it is surprising that the Euro has played a key role in structural reform. It was always viewed as the last step in a process of European integration. But the process of deregulation started in both EU and non-EU nations before the new currency came into being, says the NBER:

From 1975 to 2003, deregulation took place in all 21 nations the authors studied and in every sector of the economy.

The group of non-EU nations, including the United States, deregulated the least, but they started the period with less regulation than the EU nations; the nations that joined the EU but did not adopt the Euro, deregulated the most.

Between 1999 and 2003, though, the Euro-adopting nations picked up the pace of reform; the Euro was the key to deregulating communications and energy.

But the Euro's impact on labor markets has been more nuanced. By looking at the 1985 to 2003 period, the researchers find that the index of reform in labor markets changed far less than it did for product markets.

Moreover, they found that product and labor deregulation is linked. It is easier to change labor markets if product markets are deregulated first. It is also easier to deregulate product markets, which often means layoffs at less competitive companies, if nations already have made it easier for companies to fire people and, especially, created a safety net of unemployment benefits.